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Money for modernization of Ukraine goes to offshore

Author : Olexandr Honcharov

10:02, 21 March 2018

Money for modernization of Ukraine goes to offshore

Author : Olexandr Honcharov

Over the past ten years, a huge deficit of foreign direct investment at any level - from large state holdings to small enterprises has been noticed in Ukraine

10:02, 21 March 2018

Read original article at 112.ua

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The main problem of the Ukrainian economy lies in the fact that the Cabinet of Ministers and the Verkhovna Rada cannot use the favorable conjuncture in world markets for the development of the national economy, and worst of all - for structural transformations, in which the greatest effect from domestic and foreign investments is possible. But the world has created very good basic macroeconomic conditions: world average growth rate is 3.5%, in China - up to 7%, President Trump managed to speed the American economy to 3% at the end of the 2017 year.

Without taking advantage of this favorable situation, we, with our backward economy, will enter the next negative cycle in world markets. In particular, in late 2020 - early 2021 leading foreign analysts and experts expect a recession in the US. But are our politicians able to predict and think beyond their own pockets?! We do not have enough direct investment in the real sector of the economy. Moreover, over the last ten years we have had a huge deficit of direct foreign investments at any level - from large state holdings to small enterprises.

Also, domestic experts increasingly began to note that huge amounts of money go from Ukraine, that is, settle in offshore. And frankly speaking, Ukrainian enterprises and companies have long existed as offshore structures with Ukrainian assets. And this movement, or rather the powerful outflow of capital from our country, leaves our real sector without large-scale direct investments. And no matter what examples authorities give, no matter what plants are opened in the regions, all the same, for an active growth of production in Ukraine, a completely different rate of accumulation is needed. For example, as in China, where the rate of accumulation in the gross domestic product is 40%, and we have barely up to 10%.

Therefore, we observe quite different rates of economic growth and development of the real sector. And if the past year, 2017, was quite harsh for most Ukrainian companies and enterprises, then the current, 2018 year may be even more difficult because of the acute shortage of working capital and a sharp drop in demand in the domestic market. Plus, the external conditions for our exporters are getting tougher, and the accumulated reserves are much depleted. The president of the USA Trump since March of this year has entered trade duties on import of a steel (25%), on aluminum duties were raised to 10%. In short, the head of the White House hopes to support the US steel industry, and who will support our domestic industry?

Undoubtedly, it will be hard for those of our enterprises who do not have free access to capital markets and additional sources of income. Especially in conditions when the Ministry of Finance of Ukraine is compelled to place 3-month bonds of internal state loans at 17.5% per annum these days. Such disappointing conclusions today are made by leading Ukrainian and foreign experts and analysts. And if we don’t implement effective large-scale privatization of 2018-2020, many objects of state property will suffer bankruptcy. Accordingly, this will lead to a further reduction in production and an increase in prices in the domestic market.

In the period of such a large financial and economic crisis in Ukraine, someone will suffer more, someone less. And it's time to speak specifically not so much about individual sectors of the national economy but about different business models - public and private, which have suffered in different degrees in recent years. First of all, those who depend on import components or managed to gain foreign currency loans suffered under conditions of devaluation of the hryvnia and strong volatility of the foreign exchange market. But now it is not so important to watch the fall of individual enterprises, but to understand why the Ukrainian economy as a whole is going through this crisis so hard.

True, proceeding from the indicators of production statistics, the representatives of the financial and economic block of the Cabinet continue to assure us with surprising perseverance, say, we reached the "bottom" and began to quietly come to the surface. Another thing is that these currency "jumps" with the hryvnia in February-March this year can slightly correct the situation in general in the Ukrainian market, although, as we see, everything is changing very quickly and often not for the better. For example, we already received from the International Monetary Fund its confirmation of requirements for raising tariffs for the Ukrainian population; otherwise Ukraine will not receive the next tranche of the loan.

Therefore, I would like to hope that the new deterioration in certain sectors of our economy can be just a short-term thing. Accordingly, if there are no further shocks due to ill-considered and erroneous political decisions, then it is quite possible in the fourth quarter of 2018 there will be signs of an easy and slow recovery of Ukraine's production economy. This is also indicated by calculations and a fundamental analysis of local and foreign experts. Exactly at this initial stage of the country's economic recovery it is advisable to launch the process of large-scale privatization of 2018-2020. And the signing by President Petro Poroshenko of the law on privatization on 2 March 2018 at the meeting of the National Reform Council is a very important and positive signal for domestic and foreign investors.

What was this done for? I think that in order to ensure small, but still steady growth of Ukraine's GDP in the current and next year, 2019. Yes, we need to grow, and grow at a fairly rapid rate: 3% growth by the end of 2018 - this is the minimum. But there a key question arises: what can ensure the growth of the Ukrainian economy? Experts and investment advisers are convinced that such growth can be ensured only through direct investments. And we need the dynamics of investment in fixed assets. After all, in the vast majority of state enterprises fixed assets are worn out by more than 80%, and there is state no money for technical re-equipment and modernization.

What to do? Of course, we should attract especially import-substituting investments in the objects of state property, which in the period 2018-2020 will be exhibited for privatization. However, as noted by leading experts, starting the process of large-scale privatization, the Cabinet of Ministers did not achieve a balanced industrial policy. And, unfortunately, the situation does not change for the better. It is fair to admit that recently some necessary decisions have been made, but this process is rather slow. This applies to infrastructure companies and agribusiness. Yes, we make some right decisions here, but all this requires systematic work, stimulating the arrival of strategic foreign investors in Ukraine.

So, some true and strong decisions in a number of ministries are adopted, but they must work in a single state system. Otherwise, we will not get the proper effect from the new economic model of our government.

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